October 23, 1999

As an Era Ends, Finance Industry Enters Unknown Territory

By JOSEPH KAHN

uring the careers of every living executive in the finance industry, bankers have
made loans, brokers have sold stocks, insurers have underwritten policies to protect against disasters, and, with exceptions
that sometimes made headlines, they rarely trespassed on one another's turf.

This gentlemanly division of labor was
intended to make sure that a catastrophic
failure in one part of the finance industry
did not invade every other part -- or, more
precisely, that a stock market crash would
not undermine the entire financial system
as it did in 1929. It worked, and it has more
or less endured: Even today, after a decade that has witnessed extensive consolidation and diversification in finance, it is not
inaccurate to think of Chase Manhattanas
a lender, Merrill Lynchas a broker, and
Prudential as an insurer, though they all do
other things as well.

But with Congress about to consign the
rules that underlie that tripartite division
of financial services to history, industry
executives and analysts say it is only a
matter of time before changes already
under way mean that the largest financial
companies will offer many ways of saving,
investing, borrowing and protecting money
under one roof. The Europeans call this a
universal bank, and many say they believe
that American companies are moving
headlong in that direction.

Shares in bank, insurance and securities
companies soared Friday on merger
speculation. The biggest winners were life
insurance companies, which some saw as
prime targets of banks hoping to offer
insurance to their customers. Investors see
banks and Wall Street firms as effectively
in play as well, though industry executives said that change might come
slower than was suggested by Friday's market reaction.

Consumers stand to gain from the
convenience of finding every financial product they need in one place,
often for less money than they are
accustomed to paying. But consumer
groups have already begun to raise
red flags about privacy in a world in
which the same company insures a
customer for both sickness and early
death, or tracks how much debt a
client is incurring through mortgages, credit cars and margin loans.
The financial provider as big brother
might theoretically discriminate
against providing life insurance for
people with shaky medical histories,
or inundate those who owe lots of
money with high-cost loans.

The concept of one-stop shopping,
of course, is not a new one. American
Express,the credit card company,
already lets clients trade stocks.
Merrill Lynch already provides
home mortgages and business loans.
And Citigroup,an agglomeration of a
bank, a securities firm and an insurance company, is the antithesis of
what lawmakers sought to achieve in
the 1930's, when legislation to divide
the industry into heavily regulated
fiefs was first enacted.

But while counterexamples
abound, the practical difficulties of
cross-selling and merging across industry lines have kept American financial companies from selling the
broad range of products their European counterparts do. In particular,
the repeal of the Glass-Steagall Act
will make it far easier for banks,
insurers and brokerage firms to introduce new lines of business without
going through legal loopholes like
setting up subsidiaries in Bermuda
to underwrite insurance polices or
buying savings and loan companies
to sell bank-like products through the
back door.

"Over time, as firms fully understand the implications of this change,
it will stimulate consolidation," said
David H. Komansky, chairman and
chief executive of Merrill Lynch.
"For us and the other major securities firms, it clearly opens a range of
strategic alternatives."

Few expect the financial landscape to change overnight. Consumers tend to remain loyal to their local
bank or family stockbroker longer
than economic models predict. Moreover, some banks may not want to
sell health insurance anymore than
the Gap wants to sell television sets.

But the catch phrase in banking is
"deepening share of wallet." When a
bank is already paying rent for a
branch office and a brokerage firm
is paying the salary of a broker, they
welcome the chance to pump more
goods through existing channels.

"We will start to see the emergence of the universal bank -- all
financial services under one corporation," said Bert Ely, a banking industry consultant. He said the new legislation provided fertile soil for combinations involving bankers and insurers. "I think it's highly likely that you
would see a wave of mergers there."

American International Group,
Metropolitan Life and Prudential,
three of America's largest insurance
companies, might be among the biggest targets for banks, Ely and
other analysts said. Or, they might
look for banks to acquire themselves.
What seems certain is that the splendid isolation that insurance companies have enjoyed even more than
banks and securities companies is
nearing an end.

One model for the future is AXA
Financial,known until recently as
the Equitable Companies. The company includes Equitable, one of the
largest life insurers and sellers of
annuities, and Donaldson, Lufkin &
Jenrette, an investment banking
firm. Edward D. Miller, AXA's chief
executive, said his company long ago
began looking for synergies between
different kinds of financial services.

Though insurers have been barred
from banking, many have begun encroaching on that industry by purchasing savings and loans that they
hope to convert to commercial
banks, said Allen R. Freedman,
chairman and chief executive of Fortis Inc., a midsize life and health
insurer. Fortis is the American unit
of the Fortis Group,the big Dutch
and Belgian financial services company.

"This legislation confirms the
market reality," he said. "A lot of
little bits and pieces are being filled
in."

One big piece is Citigroup, a company that has symbolized the imminent decline of Glass-Steagall even
before the demise was assured. Citigroup was a result of a $72 billion
merger that brought Travelers insurance and the Salomon Smith Barney investment bank together with
Citibank last year. The merger
passed muster with regulators,
though only with the proviso that the
company would make adjustments
-- most likely including the spin-off
of its insurance underwriting business -- if Glass-Steagall was not repealed within two years.

As it is, Citigroup provides a
glimpse of the kind of cross-selling
financial companies say is possible
when the old walls are torn down.
For example, brokers working for
Citigroup's Salomon Smith Barney
have sold $420 million in Citibank
mortgages to their clients in recent
months, the company says. It has
also begun pilot programs in 29
states in which property and casualty insurance are sold to Citibank
credit card customers.

"By liberating our financial companies from an antiquated regulatory structure, this legislation will
unleash the creativity of our industry
and insure our global competitiveness," Sanford I. Weill and John S.
Reed, Citigroup's co-chairmen and
co-chief executives, said in a statement yesterday. "As a result, all
Americans -- investors, savers, insureds -- will be better served,"

The new legislation eliminates
what some executives viewed as a
playing field tilted in favor of traditional commercial banks. Under administrative changes in recent
years, commercial banks like Chase
Manhattan and Bank of America
have been able to purchase securities firms. Just a few weeks ago,
Chase bought San Francisco-based
Hambrecht & Quist to give it a bigger investment banking presence.
But until now, the securities firms
have not had the reciprocal right to
buy commercial banks, which have
been protected because they hold
Government-guaranteed deposits.

Some Wall Street firms covet trust
and custody businesses, a commercial banking preserve. They see
those businesses as fitting together
well with their existing asset management and brokerage businesses
because they house the wealth of
affluent individuals.

"There are elements of the commercial banking business that are
attractive to us," Komansky of
Merrill Lynch said. "For example,
we have our own trust business. This
would enable us to accelerate growth
if we choose to acquire a trust business. The global custody business is
another niche that we could be interested in."

Northern Trust,U.S. Trust,State
Street Bank and other commercial
banks with large trust and custody
services are among those that might
be attractive to investment banks,
several analysts said. Komansky
did not specify companies that Merrill would consider acquiring.

For consumers, one benefit might
be that when financial companies
rush to sell one another's products,
prices tend to fall, even collapse.
Take stock trading. Some Internet
brokerage firms now eagerly offer
the service for one-fifteenth the price
traditional vendors typically
charged just two years ago. Today,
some banks and brokerage firms offer free checking in accounts that
pay money-market interest rates. A
few years ago, many such bank accounts earned no interest at all and
had a fee subtracted for every check
cashed.

But consumer groups see a downside. Glass-Steagall, if only as a byproduct of the division of financial
services, afforded individuals a
measure of privacy because companies selling different kinds of financial services had no incentive to
share data. Now, with cross-selling
and mergers expected to produce
more unified providers, the concern
is that companies will mine data to
blitz consumers with marketing. Or,
if a bank discovers that a customer
has a deadly disease, it might use
that information to keep the person
from taking out a 30-year mortgage.

Senator Phil Gramm, a prime proponent of the repeal of Glass-Steagall, and the American Banking Association contend that the financial
overhaul offers consumers more privacy protections than current law.
But consumer and privacy advocates called the provisions a sham.

Under the bill, financial institutions would be required in most circumstances to notify their customers if they sell personal information
to third parties. Customers then
would have the right to demand that
their private data be deleted from
those files. But customers would
have no say in how private data are
shared between the affiliated companies of the financial conglomerates
that are expected to be created.